Exercises and with solutions_CH0104 (1).pdf

Exercises with solutions –
Chapters 1-4

• What are the main three major types of product costs in a
manufacturing company?
• Define the following: direct materials; indirect materials; direct labor;
indirect labor; manufacturing overhead.
• Explain the difference between a product cost and a period cost.
• What effect does an increase in the activity level have on: unit fixed
cost? Unit variable cost? Total fixed cost? Total variable cost?
Questions and Exercises (1/4)

Java Express operates a number of espresso coffee stands in busy suburban malls. The
fixed weekly expense of a coffee stand is $1,500 and the variable cost per cup of coffee
served is $0.19.
Required:
Estimate the total costs and average cost per cup of coffee at the indicated levels of
activity for a coffee stand. Round off the cost of a cup of coffee to the nearest cent.
Cups of Coffee Served in a
Week
Week
Week
3,700 3,800 3,900
Fixed cost $1,500 $1,500 $1,500
Variable cost 703 722 741
Total cost $2,203 $2,222 $2,241
Average cost per cup of coffee served $ 0.60 $ 0.58 $ 0.57

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1-4
Hough Company manufactures and sells a single product. A partially completed schedule of the
company’s total and per unit costs over a relevant range of 80,000 to 120,000 units produced and
sold each year is given below:
Required:
1. Complete the schedule of the company’s total and unit costs.
Units produced and sold
80,000 100,000 120,000
Total costs:
Variable costs $240,000
Fixed costs 320,000
Total costs $560,000
Cost per unit:
Variable cost
Fixed cost
Total cost per unit

1-5
Requirement 1:
Complete the schedule of total costs and unit costs.
Variable cost per unit = Total variable cost/Number of units
Variable cost per unit = $240,000/80,000 units
Variable cost per unit = $3.00/unit
80,000 100,000 120,000
Total costs:
Variable costs $240,000 $300,000 $360,000
Fixed costs 320,000 320,000 320,000
Total costs $560,000 $620,000 $680,000
Cost per unit:
Variable cost $3.00 $3.00 $3.00
Fixed cost 4.00 3.20 2.67
Total cost per unit $7.00 $6.20 $5.67

Harris Company manufactures and sells a single product. A
partially completed schedule of the Company’s total costs
and costs per unit over the relevant range of 30,000 to 50,000
units is given below:

Required:
- Complete the schedule of the company’s total costs and
costs per unit;
- Assume that the company produces and sells 45,000 units
during the year at a selling price of $16 per unit. Prepare a
contribution format income statement for the year.

Solution 1
30,000 40,000 50,000
Total costs:
Variable cost $180,000 $240,000 $300,000
Fixed cost 300,000 300,000 300,000
Total cost $480,000 $540,000 $600,000
Costs per unit:
Variable cost $ 6.00 $ 6.00 $ 6.00
Fixed cost 10.00 7.50 6.00
Total cost per unit $16.00 $13.50 $12.00
1. The company’s variable cost per unit is:
$180,000
=$6 per unit.
30,000 units
The completed schedule is as follows:

Solution 2
Sales (45,000 units × $16 per unit) $720,000
Variable expenses (45,000 units × $6 per unit)
270,000
Contribution margin 450,000
Fixed expense 300,000
Net operating income $150,000
2. The company’s contribution format income statement is:

Guided Example
Otsego, Inc., is a merchandiser that provided the following information:
Required:
1. Prepare a traditional income statement.
2. Prepare a contribution format income statement.
Number of units sold 12,000
Selling price per unit $25
Variable selling expense per unit $2.50
Variable administrative expense per unit $2
Total fixed selling expense $16,000
Total fixed administrative expense $17,000
Merchandise inventory, beginning balance $25,000
Merchandise inventory, ending balance $18,000
Merchandise purchases $101,000

Guided Example
Requirement 1:
Prepare a traditional income statement.
Otsego, Inc.
Traditional Income Statement
Sales ($25 per unit X 12,000 units) $ 300,000
Cost of goods sold ($25,000 + 101,000 - 18,000) 108,000
Gross margin 192,000
Selling and administrative expenses:
Selling expenses (($2.50 per unit X 12,000 units) + $16,000)
Administrative expenses (($2 per unit X 12,000 units) + $17,000) 41,000 87,000
Net operating income $ 105,000
46,000

Guided Example
Requirement 2:
Prepare a contribution format income statement.
Otsego, Inc.
Contribution Format Income Statement
Sales ($25 per unit X 12,000 units) $ 300,000
Variable expenses:
Cost of goods sold ($25,000 + 101,000 - 18,000) $ 108,000
Selling expenses ($2.50 per unit X 12,000 units) 30,000
Administrative expenses ($2 per unit X 12,000 units) 24,000 162,000
Fixed expenses:
Selling expenses 16,000
Administrative expenses 17,000 33,000

The Alpine House Inc. is a large retailer of snow skis. The company assembled the
information shown below for the quarter ended March 31:

Required:
- Prepare a traditional income statement for the quarter ended March 31;
- Prepare a contribution format income statement for the quarter ended March 31;
- What was the contribution margin per unit?

Solution 1
The Alpine House, Inc.
Traditional Income Statement
Sales $150,000
Cost of goods sold
($30,000 + $100,000 – $40,000) 90,000
Gross margin 60,000
Selling and administrative expenses:
Selling expenses (($50 per unit × 200 pairs of skis*) +
$20,000) $30,000
Administrative expenses (($10 per unit × 200 pairs of skis)
+ $20,000) 22,000 52,000
1. Traditional income statement
*$150,000 sales ÷ $750 per pair of skis = 200 pairs of skis.

Solution 2
The Alpine House, Inc.
Contribution Format Income Statement
Sales $150,000
Variable expenses:
Cost of goods sold
($30,000 + $100,000 – $40,000) $90,000
Selling expenses
($50 per unit × 200 pairs of skis) 10,000
Administrative expenses
($10 per unit × 200 pairs of skis) 2,000 102,000
Fixed expenses:
Selling expenses 20,000
Administrative expenses 20,000 40,000
2. Contribution format income statement

Solution 3
3. Since 200 pairs of skis were sold and the contribution margin totaled
$48,000 for the quarter, the contribution margin per unit was $240
($48,000 ÷ 200 pair of skis = $240 per pair of skis).

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